May brought a glimmer of hope to the U.S. auto loan asset-backed securities (ABS) market with a substantial reduction in extension rates, which now appear to have peaked in April. For prime auto loans, the extension rate (as reported in Reg AB II loan level reports) dropped 62.5% to 2.16% in May, from 5.76% in April. For the four subprime auto loan ABS shelves (AmeriCredit, Santander's DRIVE and SDART, and World Omni's Select), extensions dropped 43.5% to 8.9% from 15.7% (see chart 1).

Chart 1

We credit the tremendous decline in new extensions in May to a number of factors, including:

• The lifting of stay-at-home orders brought some furloughed employees back to work.
• The government's enhanced unemployment benefits of $600 per week gained momentum after initial delays at the state level.
• Stimulus/relief checks of up to $1,200 were received by many consumers.
• Some of those who needed hardship relief in March or April received multi-month-long extensions, thereby obviating the need for another extension in May.

With respect to the multi-month extensions, Ally has led the way on the longest deferral, with 60% of its April extensions (68% in March) being for four months. Fifth Third's and VW's most popular extension period in April was for three months. Unsurprisingly then, these companies reported large drops in extensions in May, with all three reporting levels of 2.0% or less for the month (see chart 2).

However, even with May's drop in deferments, the percentage of loans receiving extensions remained higher than February's pre-COVID-19 levels. Further, for some issuers, the percentage of their pools in extension status remains high, as discussed below.

All Public Issuers Reported Lower Monthly Extension Rates In May Compared With April

All 21 Reg AB II shelves in our analysis reported lower monthly extension rates in May compared with April. In the prime segment (17 shelves), the average month-to-month reduction was 60%, with the largest reductions being posted by BMW, Ally, Harley, and Honda (chart 2). Those reporting the lowest overall extension rates in May were CapOne, Harley, and Honda with rates of only 0.9%, 1.0%, and 1.2%, respectively.

In subprime, the four public shelves reported declines of 42%-55%. Most notably, DRIVE's monthly extension rate, which had been 20.6% in April, declined to 12.0% in May (chart 3), and World Omni Select 2019-A's extension rate dropped by more than half to 8.9% in May from 19.6% in April. We've also included 10 144a subprime issuers' shelves in our analysis; for these issuers, we're using their monthly servicing reports to extract extension data. All of them, except Avid, reported substantial declines in extensions in May relative to April. COVID-19-related amendments under Avid's warehouse agreements allowed them to loosen their extension policy company-wide and contributed to the 387% increase they saw in their extensions in May.

Chart 2

Chart 3

Active Loans In Extension Status Exceed 10% Of the Pool Balance For Several Issuers

Even with May's reduction in extension rates, several Reg AB II issuers have 10% or more of their pools (on a dollar basis) in some form of extension status (see chart 4). This includes loans that received their first post-COVID-19 extension in May, loans that received an extension prior to May and another one in May, and those that were still in extension status as a result of having previously received a multi-month extension. For example, in the prime segment, Ally, California Republic Bank (CRART shelf), and World Omni had approximately 19%, 15%, and 11%, respectively, of their pools in extension status as of the end of May. In subprime, Santander's two subprime shelves, DRIVE and SDART, had approximately 31% and 26% of their loans in extension status, respectively; World Omni Select had 25%; and AmeriCredit had nearly 11%.

Chart 4

Those with 5% or less of their pools in extension status are CapOne (1.0%), USAA (3.3%), GMF (3.5%), CarMax (3.6%), Nissan (3.6%), Hyundai (3.6%), and Harley (5.0%). Four of the seven used the one-month extension as their most-frequent extension in both April and May (CapOne, CarMax, Nissan, and Hyundai).

Extensions Are Getting Shorter

In March, public issuers relying primarily on the one-month extension (as opposed to longer extensions) numbered only three (CarMax, Hyundai and Nissan), but by May the one-month extension represented the majority of extensions for eight issuers (see charts 5 and 6 heat maps). Further, Ally, which for March and April had used the four-month extension as their "go-to" deferral, pulled back on the deferral period with 32%, 24%, and 38% of its May extensions concentrated in the one-month, two-month, and three-month periods, respectively, with the four-month extension falling to only 3.2% of its May extensions. Fifth Third and VW continued to focus on the three-month extension.

Chart 5

Chart 6

Unexpectedly, a meaningful percentage of loans in extension status made payments. Of the prime loans extended in May, on average approximately 29% had made a payment even though they received an extension that month (see chart 7). This could occur, for example, if someone is behind on two payments as of May 15 and the lender agrees to give the customer more time to make the May payment as long as the customer makes April's payment. In subprime, an average of 32% of the loans that received an extension in May also made a payment.

Chart 7

Various Trends Of Loan Extensions Observed

Prime

For the month of May, we tracked what happens to the loans after they've been extended and observed various trends. Approximately 50% to 99% of most of each prime issuer's loans extended since March are still in extension (see chart 8). The percentage is 63.5% for the prime segment as a whole. This is comprised of the newly extended loans in May (11.65%; shown in dark blue in chart 8 below), the re-extended loans (8.09%; medium blue), and loans that were previously granted a multi-month extension and remain in extension (43.8%; light blue). This last category represents the highest category of those in extension status.

Chart 8

In respect of the total universe of prime loans extended since March through May of this year, Ally granted the fewest new extensions in May (5.5% of loans in extension status) and had one of the lowest rates of re-extension for April/May (3.3%), but had the highest percentage of loans otherwise still in extension (78.7% of loans in extension). By contrast, GM Financial granted the highest amount of new extensions in May (27.9%), but had almost the lowest rate of re-extension for April/May (1.6%), and a somewhat above-average percentage of loans otherwise still in extension (49.7%). This means that the total loans for Ally and GM Financial currently in extension are 87.5% and 79.3%, respectively, relative to the total number of loans extended since March, whether having been newly granted in May, re-extended for April/May, or are otherwise still in extension. In addition, almost all of Fifth Third's (99.4%) and VW's (93.0%) loans that have been extended since March are still in extension. This is hardly surprising given that Fifth Third's and VW's most-used extension period in April and May was three months.

We also tracked the percentage of previously extended loans that have come out of extension status. In the prime segment, CarMax, CapOne, and Nissan had the highest percentage of extended loans making payments in May (51.4%, 40.9%, and 36.1%, respectively), as shown in green in chart 8 above. This makes sense since their extension period of choice has been primarily one month. For the prime segment as a whole, only 21.0% of those contracts receiving an extension from March to May made a payment in May, 0.8% paid off, 0.03% were charged off, and the remaining 14.6% have come out of extension status but haven't yet made a payment. Most of the contracts making a payment are reported as not delinquent; however, certain lenders received payments on a significant number of contracts that are reported as delinquent.

Subprime

Approximately 65% to 84% of each subprime issuer's loans extended since March are still in extension (see chart 9), with an overall level of 81.5%. This is comprised of the newly extended loans in May (21.2%; shown in dark blue in chart 9 below), the re-extended loans (10.8%; medium blue), and loans that were previously granted a multi-month extension and remain in extension (49.4%; light blue). DRIVE's shelf had the highest level of extended loans over the time period remaining in extension status (84.3%), followed by SDART (83.5%), AmeriCredit (70.2%), and World Omni Select 2019-A (65.1%).

Chart 9

Only 11.3% of subprime contracts that were extended between March and May came out of extension status and have made a payment, 0.2% paid off, 0.02% were charged off, and the remaining 7.0% have come out of extension status but haven't yet made a payment. AmeriCredit has the highest payment resumption rate of 20.9%, followed by World Omni Select with 16.7%.

Extensions Remain Highest In Vacation States/Territories

As illustrated by the charts 10 and 11 heat maps, the locations with the highest extension rates are those that employ a large segment of their workers in the leisure and hospitality industries. The locations with the highest May extension rates for both prime and subprime were Puerto Rico, Nevada, and Florida. In the prime segment, May extensions for these three areas equaled 4.86%, 4.07%, and 3.61%, respectively, of the loans outstanding in those states. In subprime, loans extended in those locales in May represented 18.4%, 12.1%, and 11.3%, respectively. Hawaii, California, Texas, Georgia, Maryland, and Washington DC were also in the 10-highest extension rate states/territories for both prime and subprime. Similar to several states, in response to COVID-19, Washington DC passed a law barring repossessions during a public health emergency, and included a period of up to 60 days thereafter. Its public health emergency was extended through May 15, which prevented repossessions until after July 15 and contributed to the high extension levels in May. Maryland also renewed its state of emergency on July 1, during which repossessions were banned. Other states, such as California and Texas, strongly discouraged repossessions.

Chart 10

Chart 11

U.S. Auto Loan ABS Outlook

The big question at this point is whether loans, when they come out of extension status, will be able to resume normal payments. This will depend upon several factors, including how quickly the COVID-19 spread can be contained and business activity can more fully resume; unemployment levels, which remain elevated; and whether enhanced unemployment benefits, namely the extra $600 per week, remain intact or are replaced with some other form of additional income to compensate those who remain out of work due to the pandemic.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions, but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research

• U.S. Auto Loan ABS Tracker: May 2020 Performance, July 9, 2020
• Will Spring U.S. Auto Loan Extensions Bring Summer Payments? June 4, 2020
• While Stay-At-Home Orders Clear Traffic, U.S. Auto Loan Extensions Rise, April 30, 2020
• The Potential Effects Of COVID-19 On U.S. Auto Loan ABS, March 26, 2020

The authors would like to thank Bushra Dawawala for her research contributions to this report.